In different relative strength kept us out of WMT during 1992, even though the stock's nominal price moved up over that period. As 1993 gets underway there is little evidence of organized distribution, apart from increased volatility. There is no good reason to make a trade in the stock, long or short, so we remain neutral.
However, flagging relative strength was a sign that the stock's advance was weakening, and shortly after the new year, WMT begins to slide. The initial drop is precipitous, but encounters support around 13. WMT trades irregularly lower before a shakeout at B sets up a sharp recovery.
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After rallying from B, WMT immediately gives back most of the gain before a weak rally tests the downward sloping trendline of both nominal and relative prices at C (see below). The stock is set up for a short sale. There is ample evidence of weakness, and the recovery into overhead supply offers a low-risk opportunity to test the short side.
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But the trade is less than compelling. By the beginning of 1994 technical indications for WMT are mixed. The weakness of the stock is offset by evidence of support around 12, and from the beginning, signs of organized distribution have been paltry. Despite these reservations, we decide to take the short, but we trade small and with a close stop.
From C WMT declines into an area of support at D (see chart below). From the sharp increase in volume as support is approached we conclude that weak traders are selling into the bag en masse.
The rally from D is short-lived, however, and price declines again, this time below all previous support. Given signs of support at D, the new low at E might be a bear trap, but at this point, a bullish interpretation is tenuous. Our commitment to our short position is weak enough and our suspicions of a shakeout strong enough that we decide to cover on any reversal of the downward trend.
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WMT rallies back above support around 12. The sharp rally slams the trap shut. It now appears that the break was indeed a shakeout and that strong hands are taking control near the lows. We cover our small short position at the market.
WMT rallies, then hovers between 12 and 13 for several months, before testing support again on a decline to F (see below). Volume increases, spread narrows, and price churns. It is becoming clear that strong hands are taking all offers below 12. But the volume on this retest of support remains relatively high, a sign that sellers are still numerous.
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More dull trading. Then the stock shatters all previous support on the decline to G. Volume, however, does not reach the same high levels it did at F or, earlier, at D. Sellers may now be exhausted. Again we suspect a shakeout. Still, there is no evidence of strength, so we remain neutral.
If this is a shakeout, potential overhead supply has been frightened out low in the range. As a result, any subsequent rally is likely to encounter lighter selling than would otherwise have been the case.
To the casual observer, the tape over the last two years has offered little bullish encouragement. The stock has been weak, and volume has increased on declines. But the price-volume character of liquidation and accumulation are very similar. In either case, volume expands on declines, and, even during accumulation, price action may continue weak. The quality of trading around the lows of the range is key to detecting accumulation.
As noted in our earlier study of GE, increased volume accompanied by high-low compression at trading lows is an early sign that shares are being accumulated. The tendency of the price to consistently rally out of new lows is another sign that strong hands are taking advantage of shakeouts to gather in shares from weaker traders.
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Over the last 18 months, WMT has progressed through a series of shakeouts within a relatively narrow price range, from 12 to 10. Multiple shakeouts and high volume toward the bottom of the range indicate that a battle is being waged around the lows, where strong hands are most active during accumulation. Under cover of weakness, strong hands are taking in shares.
We want to take an initial long position as close to friendly support as possible, but our discipline requires some indication that the stock is on the threshold of markup. A rally back above recently broken support around 11 1/2 will be our cue to take an initial long position at the market.
A one-half point chart of WMT provides two preliminary upside targets. The first count of 2 1/2 points (1/2 x 5=2 1/2) across the 11 row offers a target of 13 . This count makes sense to us since it returns WMT to the high point of the last rally.
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However, we may take another, somewhat more aggressive count across the 11 1/2 row. We begin our count, right to left, from the stock's current position to the first point of support. The nearest high volume reversal is F (shown below), and it is the one from which we take our next count. This is one of several points at which strong hands emphatically assert control, and it is the point from which this latest phase of accumulation begins.
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The count we take, from the initial support at F to the current point of support, encompasses two rows of x's. While most counts occupy a single row, some do not. Remember, accumulation often feigns weakness, so price may slip considerably from the first point of support to the final reversal point in the accumulative process.
This second count offers a target of 14, as shown in the chart below. The base under WMT is becoming very large, and much higher targets are possible. But we will not consider them unless and until our initial, modest targets are reached.
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The stock begins to rally out of the shakeout at G (see below). This is the evidence of strength we need, and we take a long position at the market as the price climbs above 11.
Our first target of 13 is reached at H. WMT then gives up half the gain on a reaction to I. This brings the price back to solid support above 11. The reaction appears normal, and volume indications are benign. After a two-day rally, the price falls back to J in a secondary test of support. Volume increases as the high-low spread compresses on this test, demonstrating support for WMT at this level. We add to our long position at the market.
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WMT clears supply at 13 and rallies to our second target of 14. Based on price-volume activity alone, we have little reason yet to abandon our long position.
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However, WMT's RS tells a different story. We note a divergence between the nominal and relative strength of WMT. While the stock's nominal price broke its downtrend on the rally to K, relative price did not confirm this apparent sign of strength.
The rally from G to K has added roughly 1/3 to the nominal price of WMT. Ordinarily we would welcome this break-through rally as a prelude to much higher prices. But the inability of RS to confirm is a clear, bearish divergence.
This divergence puts us on guard. The new high at K may prove to be a trap. Traps, or shakeouts, attract the wrong sort of sponsorship and often lead to important counter moves. As a rule, a bull trap is confirmed once price falls back below the average close of the recent trading range We are prepared to liquidate our long position should the breakout at K fail by falling back into the average of recent closes.
The stock has reached our second objective of 14, and based on WMT's poor relative strength, we have serious doubts now about the stock's near-term prospects. These doubts are confirmed as WMT dips back toward 13, and we close our long position at the market.